What's Next for Eastern European Telcos?. (Current Research)

At first glance, Central and Eastern Europe's fixed-line telecom incumbents would seem to be in a fortunate position. In 2001 most of them--helped by big profits from monopoly-priced long-distance and international calls--boasted respectable profit margins (Exhibit 1) compared with their Western European counterparts, which are burdened with massive debt and dwindling margins. Such high returns will be hard for the incumbents to sustain. Most of these former monopolies are now either deregulated or nearly so, and competition will increase when the European Union admits their countries--some probably as soon as 2004. (1) Increased deregulation--which among other things will allow competitors to use the incumbents' networks at lower prices determined by costs--will open the door to full competition. The incumbents will have to respond by cutting their rates for long-distance and international calls, which have been a money-maker for most of them, and by increasing their access fees and rates for local calls, thereby better aligning their prices with their cost structures. Poland is by far the region's biggest fixed-line market (Exhibit 2, on the next page), and here the incumbent, Telekomunikacja Polska, will lose its monopoly in international voice telephony in January 2003. Matav, Hungary's incumbent, which is controlled by Deutsche Telekom, rebalanced its tariff structure well before the deregulation of the country's fixed-line business was completed, in December 2001. (Matav increased its basic monthly fee for residential customers by 27 percent and reduced its international rates by 15 percent.) Most operators will no longer be able to rely on growth in fixed-line voice telephony to sustain high returns, for many potential customers, often young and short of money, want only a fashionable and convenient mobile connection. This trend, though evident in the European Union too, is more pronounced in Central and Eastern Europe, where mobile telephones emerged at a time when many households didn't already have a fixed telephone. As a result, the saturation level for fixed-line penetration averages around 30 percent in the EU's candidate countries as a whole and 40 percent in relatively advanced ones such as Hungary and the Czech Republic-compared with an average of about 55 percent in the present members of the European Union (Exhibit 3). A natural first step for any incumbent trying to counter the combined forces of deregulation and saturation is to lobby national regulators to take its infrastructure investments into account when setting interconnection tariffs. But regulatory intervention won't be enough. Fortunately, most of these companies could hugely improve their productivity, which is generally well below EU levels. While improvements ought to be implemented across whole companies, operators should focus in particular on increasing the efficiency of their network operations (call centers, dispatching centers, frontline technicians), their sales forces and retail-distribution networks, and their back-office functions. …